Quote:
Originally Posted by FL2021
For accounts such as 401k, IRA, Roth, etc., we received a mixed advice from our legal and financial services as to whether our children or the Revocable Trust should be named as the secondary beneficiary (after spouse being the primary).
For those of you who have already walked this path, is there a simple answer to this?... or perhaps there are pros & cons to either one? e g., difference in tax implications?
|
What we were told was the difference is in the tax implications. As I understand it:
- if the trust is named then the trust has five years to withdraw the funds from the tax-deferred accounts. So divide the total amount by five and calculate the tax on that based on whatever tax rate a trust has to pay.
- if a person is named then they have ten years to withdraw the funds from the tax-deferred accounts. If multiple people are named then the total amount is allocated per the trust and then divide those numbers by ten and calculate the tax on that based on the individual's tax bracket.
A higher number divided by five and taxed at the trust rate (if different) will likely result in more taxes being paid than if that same number is split among several beneficiaries, divided by ten, and taxed at the individual's rate.
WE WERE ALSO TOLD by our financial services that they would not accept the conditions we placed on the trust for our beneficiaries (payable only after the beneficiary reaches a certain age). Therefore we were given the choice of naming the trust (higher taxes) or naming our beneficiaries with no conditions even if they were still younger than what we would like.